Pennsylvania's Capital Is Drowning In Debt And Likely To Threaten Bankruptcy Again

Pennsylvania's capital city Harrisburg, neck-deep in more than
$340 million debt, is on the verge of getting a powerful
negotiating tool with creditors: the threat of bankruptcy.

A state ban that prevented Harrisburg from filing for municipal
bankruptcy protection is set to expire after November 30.

A year has passed since Harrisburg first tried filing for
bankruptcy in October 2011. The city is now deeper in debt and
there is no guarantee that it will not seek court protection once
again.

"They're still having a problem bridging the revenues and the
liabilities they have to pay," said Emanuel Grillo, chair of the
financial restructuring group at the law firm Goodwin Procter.

"They haven't gotten bondholders or other constituencies to take
a big enough hit," he said. "Waiving the bankruptcy option out
there is really an important tool, even if [the city] never uses
it."

When Harrisburg first attempted bankruptcy protection, the
cash-starved city became a poster child for U.S. cities still
trying to recover from years of lower, recession-hit property tax
revenues while faced with growing pension obligations, healthcare
costs, salaries and other expenses.

Harrisburg, like some other cities, took out significant debt to
finance a project -- an incinerator -- that later failed to make
enough money, bringing it to the verge of financial collapse.

Since last October, Harrisburg's debt has swelled from $300
million to $340 million.

Its receiver, William Lynch, had to skip a $3.4 million general
obligation debt service payment in September in order to pay city
employees. Harrisburg still faces a projected cumulative deficit
of $14.8 million by the end of fiscal 2012.

Harrisburg is closer to selling some assets such as its trash
incinerator and public parking system to raise money as a key
component of its recovery plan, Still, any potential agreement
with buyers must still be approved by the state court overseeing
the plan.

LAWMAKERS NOT LIKELY TO EXTEND BAN

The capital city accumulated its mountain of debt during several
rounds of multimillion-dollar bond deals to finance the repair
and retrofit of its incinerator.

About two weeks after Harrisburg's city council first filed the
bankruptcy petition, Pennsylvania Governor Tom
Corbett declared a state of fiscal emergency for the city of
nearly 50,000 residents, about a third of them living in poverty.

A federal judge later blocked the city council's Chapter 9
petition after state lawmakers banned it. Urged on by veteran
Republican state lawmaker Jeff Piccola, the Pennsylvania
legislature later extended the ban.

Piccola represented Dauphin County, which guaranteed some of
Harrisburg's incinerator debt and is now one of the city's
creditors.

But with Piccola retiring and a Democrat taking his place, many
city and state officials believe state lawmakers won't extend the
ban a second time - especially since state lawmakers are not
scheduled to consider any new legislation until January

"The lack of threat from Senator Piccola and the legislature to
reinstate the bankruptcy ban is going to be an effective tool for
negotiations. There's no doubt about it," said Harrisburg City
Councilman Brad Koplinski.

CREDITOR PRESSURE

Lynch -- the only one who can put the city into bankruptcy -- has
said he should be allowed to do so if he needs to.

Bankruptcy "is an option that needs to be on the table," said
Cory Angell, a spokesman for Lynch, who was unavailable for
comment.

The threat of bankruptcy could get creditors, including bond
insurer Assured Guaranty Municipal Corporation, or AGM,to return
to negotiations and consider forgiving as much as a third of the
city's debt.

Harrisburg skipped several incinerator debt service payments due
in September, leaving AGM to cover the $1.4 million in payments.

Altogether, AGM has $155.2 million of net par exposure to
Harrisburg and had paid out $8.6 million as of June 30 on claims.

The bond insurer declined to comment on the expiration of the
city's bankruptcy ban.

AGM, along with creditors TD Bankand bondholder trustee M&T
Bank, won county court approval in March for a separate receiver,
who oversees the cash flow of Harrisburg's incinerator and
operate independently of Lynch.

Attempting to implement the recovery plan is an important step in
case the city does go bankrupt, so that it can show it tried
other remedies before asking a court for relief from creditors,
according to Angell.

"I think if we were to go into a bankruptcy situation, of course
that court is going to ask you what have you done to meet your
obligations and I think the answer to that should be we've tried
to implement this recovery plan," Angell said.